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How to Help Avoid Getting Clobberedin the Next Bear Market
D I S C L O S U R E S : W E B E L I E V E T H E I N F O R M A T I O N P R O V I D E D H E R E I N I S R E L I A B L E B U T S H O U L D N O T B E A S S U M E D T O B E A C C U R A T E O R C O M P L E T E . T H E S T R A T E G I E S D E S C R I B E D M A Y N O T B E S U I T A B L E F O R A L L I N V E S T O R S A N D M A Y N O T B E A P P R O P R I A T E A T A L L T I M E S . P E R F O R M A N C E I S F O R S E L E C T E D P O R T F O L I O S , W H I L E I N D I V I D U A L I N V E S T M E N T P E R F O R M A N C E I S D E P E N D E N T U P O N T H E P O R T F O L I O ( S ) O F I N V E S T M E N T . T H E P A R T N E R S A N D A S S O C I A T E S O F A T L A S C A P I T A L A D V I S O R S A R E I N V E S T O R S I N A T L A S P O R T F O L I O S . P A S T P E R F O R M A N C E I S N O T A G U A R A N T E E O F F U T U R E P E R F O R M A N C E . O P I N I O N S A N D S T A T E M E N T S A R E B A S E D O N C U R R E N T M A R K E T C O N D I T I O N S A S O F T H E D A T E O F P U B L I C A T I O N A N D A R E S U B J E C T T O C H A N G E W I T H O U T N O T I C E .
38 Keyes Boulevard, Suite 200www.atlasca.com San Francisco CA 94129 © 2015 Atlas Capital Advisors, LLC
Is the next recession around the corner?
27/13/2016 © 2016 ATLAS CAPITAL ADVISORS LLC
European Situation
Chinese Bubble
Student Loans
Labor Force Participation Rate
No Central Bank Wiggle Room
Slowing Growth
Declining Profits
Oil
We don’t know, but we have suggestions
Jonathan E. Tunney, CFA – Founder and Managing PartnerJonathan (Jono) founded Atlas Capital in 2003 after holding numerous treasury positions at Hewlett-Packard. He holds a BA in Economics and Political Science from Stanford University, an MBA in Finance from the Anderson School at UCLA, and the Chartered Financial Analyst designation.
Albert J. Gutierrez, CFA – Partner and Head of Fixed IncomeAlbert (Bert) joined Atlas in 2010 and has more than 30 years of capital markets experience at firms including SCM Advisors, American General Investment Management, and Conseco Capital Management. Bert holds a BS in Economics from The Wharton School, University of Pennsylvania and holds a Chartered Financial Analyst designation.
Kenneth J. Frier, CFA – Partner and Chief Investment OfficerKen Frier joined Atlas in 2015 with more than 25 years of capital markets experience including CIO roles at Hewlett-Packard, Stanford Management Company and the UAW Retiree Medical Benefits Trust. Ken holds a BS in mathematics from the University of North Carolina at Chapel Hill, an MBA from the Stanford University Graduate School of Business and the Chartered Financial Analyst designation.
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The last two recessions led US equity investors to lose about half their asset value
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S&P 500 Total Return Index
51% Drawdown
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Source: Bloomberg
44% Drawdown
The stock market generally predicts recessions better than economists do
• There have been seven US recessions in the last fifty yearso Number forecast by the consensus of
economists: zero
• In the past 15 years there were 220 instances of economic growth changing from positive to negative at countries around the worldo Number forecast by the consensus of
economists: zero
• There have been seven US recessions in the last fifty yearso Number where there was a 15% fall in the S&P
500 within one year of the recession start: seven
• There were five other times the S&P 500 fell 15% or more where there was no recession within a year
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Neither track record is ideal, but which is better?
ECONOMISTS THE STOCK MARKET
Past performance is not necessarily indicative of future results.
What if you owned stocks only when the prior year return was positive, and Treasury bills otherwise?
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S&P 500 Total Return Index
51% Drawdown
13% Drawdown
6% Drawdown
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Source: Bloomberg
44% Drawdown
Past performance is not necessarily indicative of future results.
Future stock market returns tend to be better when prior returns are positive
• The chart is based on S&P 500 data since 1960
• It shows the average return for the next three months as a function of whether the prior one year return was positive or negative
• The 1.1% per quarter advantage can be helpful to portfolio results
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Prior year gain Prior year loss
Next 3 Month Return
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Past performance is not necessarily indicative of future results.
Valuation matters also
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The three big questions
The most important questions faced by global equity investors:
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1. I know that equity risk is the most dominant risk in our portfolio. Is it a relatively attractive time to have global equity investments in my portfolio? If not, what’s a good way to avoid big losses in the next market downturn?
2. Global economies seem to be diverging. How should I allocate my equity investments across geographies?
3. How should I manage the currency risk of investing outside my home country?
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Addressing the 3 questions
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Invest globallyCreate alpha from beta
management• Diversification across geographic markets provides the opportunity to benefit when there are attractive markets outside the home country.
• Use ETFs or futures to achieve equity beta cheaply
• Generate return (alpha) from systematic beta management – informed choices about which stock markets to own
• Separation of beta and alpha is often under-appreciated and under-utilized by investors
Take risk only when rewarded
• Determine “bad neighborhoods”: Examine valuation, momentum, fundamentals, sentiment, risk and currency impacts for each market
• “Water the flowers, not weeds”: avoid bad markets
• “Correlation matters”: When too many neighborhoods turn bad, move assets to short-term fixed income to avoid contagion risk
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Five step process of analysis
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UNIVERSE SELECTION: Analyze forty-eight segments of global stock market, four tiers of weighting based on market capitalization, equal weight within tiers
NEIGHBORHOOD SCREEN: Exclude countries/sectors that exhibit bad neighborhood characteristics (based primarily on value and trend)
VALUATION ASSESSMENT: Evaluate remaining countries/sectors based on economic fundamentals, risk, expected return and historical valuation metrics
PORTFOLIO WEIGHTING: Re-weight remaining countries/sectors based on risk and valuation outlook. If too few “good neighborhoods”, some allocation to short-term fixed income.
CURRENCY MANAGEMENT: Aggregate and evaluate major currency exposures. Hedge currency risk if value and trend indicate hedging desirable.
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Be dynamic as market attractiveness changes
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Most markets
unattractive
Most markets
unattractive
US markets more attractive
than non-US
Non-US markets more attractive
than US
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What are the bad neighborhoods today?
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North America Developed:US Sectors:• Consumer
Discretionary• Cons Staples• Energy• Financials• Health Care• Industrials• Technology• Materials• Telecom• UtilitiesS&P 400 mid capS&P 600 small capCanada
Europe Developed:AustriaBelgiumDenmarkFinlandFranceGermanyIrelandIsraelItalyNetherlandsNorwaySpainSwedenSwitzerlandUK
Emerging Markets:BrazilChileChinaFrontier 100IndiaIndonesiaMalaysiaMexicoPhilippinesPolandRussiaS AfricaTaiwanThailandTurkey
Asia/Pacific Developed:AustraliaHong KongJapanKoreaSingapore
Black: at/over market weight, Purple: below market weight, Red: highest risk.
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• Stock market performance can be a leading indicator of economic weakness
• Stock markets are particularly dangerous to own when they are falling andvaluation indicators are unappealing
• It is potentially worthwhile to:
o Divide global stocks into numerous country/sector markets
o Drop out of the “bad neighborhoods”
o Adjust weights to “good neighborhoods” based on value
o Be willing to own cash if insufficient good neighborhoods
Summary
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ContactATLAS CAPITAL ADVISORS LLC
38 KEYES AVE SUITE 200 SF CA 94129
415-354-2400
157/13/2016 © 2016 ATLAS CAPITAL ADVISORS LLC
